The $26.5 billion merger of T-Mobile (NASDAQ:TMUS) and Sprint (NYSE:S) looks like it may again be in danger of not getting approval. It appeared the deal was set to close when Federal Communications Commission Chairman Ajit Pai said earlier in May that his agency would likely sign off on it.
Now Justice Department antitrust chief Makan Delrahim may put up a roadblock that makes the deal much less likely, according to a recent Bloomberg story. Delrahim remains hung up on the idea that going from four carriers to three harms consumers, according to the story.
To remedy that, the Justice Department may want the two companies to spin off their own competitor. Exactly what that would look like is not explained, but it could involve using Sprint's network to create a new company while T-Mobile migrates its newly acquired customers to its own network.
What is the big concern?
Sprint Executive Chairman Marcelo Claure and T-Mobile CEO John Legere have made the argument that it's better to have a strong No. 3 after AT&T (NYSE:T) and Verizon (NYSE:VZ). The combined T-Mobile-Sprint would still have fewer subscribers than its rivals with about 136 million compared with AT&T's 156 million and Verizon's 153 million.
Legere and Claure have explained that the combined company could build out a 5G network much faster than either could on its own. Sprint has also warned that it's not in good financial shape and that without the merger it may not survive.
Sprint has been growing by offering discounts at a rate that's not likely sustainable. That has kept up its subscriber count for reporting purposes but hasn't helped the company's bottom line, and whether it has the money to invest in a new network would depend upon whether majority shareholder Softbank wants to keep throwing good money after bad.
What's going to happen?
It's hard to picture T-Mobile agreeing to pay for Sprint and then launching its own competition. That's a pretty major concession, and it would probably mean selling some Sprint network assets to a potential rival (possibly one of the big cable companies that passed on buying Sprint outright).
Sprint needs this merger to happen. T-Mobile has always been willing to walk away if the price is too high. That's what it should do if the Justice Department remains hung up on the three-versus-four argument.
That concept sounds right on paper because more competition generally benefits consumers. In this case, T-Mobile has built its business around a transparent, customer-friendly model. It has led massive changes in the industry that all benefit the customer, not the wireless carrier.
It's very hard to believe that the new T-Mobile would make major changes and not continue to be a company that treats consumers well. Four is greater than three, but Sprint is a very weak four that may go away anyway. It seems like the Justice Department prefers that scenario -- which would still end up with three carriers -- than one that leads to a more powerful T-Mobile.
If this is the deal that will be approved, Legere should walk away. That's bad for the public, but, ultimately, T-Mobile has been growing steadily and it has shown it can succeed in being a disruptive force.